Navigating Retirement: Annuities vs. IRA Withdrawals for Brown & Brown Employees

There are just a couple of things almost all Brown & Brown retirees need when they hit retirement: predictable income and protection against a cluster of risks, which include longevity risk, performance risk and sequence-of-returns risk.

In the past we have seen retiring Brown & Brown employees utilize the “4% rule,” where retirees take annual withdrawals start at 4% of the entire portfolio and increase with inflation. They then keep the remainder of the portfolio with at least 50% invested in equities. Based on historical data, this would give a Brown & Brown retiree about 30 years of retirement income.

As the economy constantly changes, a number of factors may force prospective Brown & Brown retirees to revisit the 4% rule. It may be worth considering annuities as an alternative.

As life expectancies increase, Brown & Brown retirees need to prepare for expenses over a longer time frame. In the past we would plan for a 15 to 20 year retirement, but now we need to prepare for a 30 to 35 year retirement. What is available to assist meeting the 35-year time frame?  

The annuity strategy can assist with a few of the pitfalls we see in the 4% rule. For example:

If you need $50,000 per year in retirement and need that for 30 years, you may need $1.2 million in fixed income at a 3% interest rate. BUT if you look to fund $50,000 for 30 years, you can cover that expense with $800,000 by choosing the annuity option.

The other pitfall with the 4% rule is that it may not reflect a client’s risk tolerance. When you are accumulating assets, you can afford more volatility and can take on more risk than when in the retirement and withdrawal phase after leaving Brown & Brown. 

Also, should we see a drop in the market, you would be able to reduce your income using the 4% rule, which you cannot do if you choose an annuity option.

 

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